The Bush Administration's response to 9/11 has weakened the position of the dollar in the world.

A mismanaged war, the oil crisis and a flood of U.S. currency are setting the stage for economic disaster.

A mismanaged war, the oil crisis and a flood of U.S. currency are setting the stage for economic disaster, investment banker Ken Miller reports.
The disastrous impact on the economy of George W. Bush's response to the attacks of September 2001 is still being measured. On Friday of last week, the Bush Administration announced that it would not re-nominate Gen. Peter Pace as chairman of the Joint Chiefs of Staff. The Administration's decision to throw a loyal supporter overboard avoids a messy confirmation hearing that would have further focused a war-weary nation's attention on the past. But sometimes looking backward can help us anticipate the future.

In February of this year, Rep. Henry Waxman's Committee on Oversight and Government Reform revealed fresh details of how the Coalition Provisional Authority dumped $12 billion in cash -- in $100 bills -- into Iraq in 2004. Multiple flights of huge C-130 transport planes were required to deliver 363 tons of greenbacks -- a modest portion of the $510 billion we have spent so far in Iraq and Afghanistan. By certain measures, this may not be America's most expensive war. But the worst economic effects are yet to come.

No matter how the Iraq War ends, it is clear that the United States is incapable of militarily securing territory against the wishes of a hostile population. And the Iraq War is at the heart of two alarming trends that are likely to have a negative impact on America's position in the world: The demand for oil is rising while the supply is declining, and the demand for the U.S. dollar is declining while the supply of dollars is rising.

In the four years since the toppling of Saddam Hussein, the Iraqi oilfields and associated infrastructure have sustained 400 attacks. And because of the situation on the ground, Iraqi oil production, at 1.95 barrels per day during the first quarter of 2007, was far short of the government's goal of 2.5 million barrels per day and the previous peak of 3.7 million under Saddam. In this asymmetrical war, our enemies are spending a fraction of our costs on improvised explosive devices, chlorine gas and human bombers, while we invest heavily in noneffective weapons systems and force structures.

U.S. oil and gas production peaked in the early '70s, and we are now by far the world's largest energy importer. The largest oilfields in Saudi Arabia, Kuwait, Iran, Syria, Yemen and Oman are in decline, as are most oilfields in the former Soviet Union, Canada, Central and South America, and on-shore Africa. New fields will be discovered and new technologies brought to bear, but costs of production will be higher than in the past and will require more expensive investments in equipment and technology.

Even as existing fields age, the new economies of India and China require more and more oil to fuel their impressive growth. Although a worldwide depression might result in a temporary drop in the price of oil and other commodities, the long-term imbalance between growing demand and declining supply will eventually reassert itself, creating price increases over time.

Contemporaneously with the supply/demand imbalance in oil and other hard commodities, the Bush Administration's response to 9/11 has weakened the position of the dollar in the world. The president's request that Americans continue to spend has struck an all-too-sympathetic chord with the American people. The trade deficits caused by that spending have created a current account deficit equal to 6.2 percent of GDp, sending trillions of dollars into the hands of foreigners.

While we continue to import goods of much greater value than those we export, thus flooding the world with dollars, Bush has pursued a policy of what some have dubbed "military Keynesianism" -- that is, the combination of low taxes and high military expenditures. This dynamic forces the Federal Reserve to print money and foster easy credit policies, which will eventually result in higher interest rates, inflation or both.

So the printing presses are spewing out more dollars, which are being collected by China, Japan and others. And those countries are showing signs of concern that they have too much of their foreign exchange reserves tied up in our currency. Likewise, certain other nations are evidencing a declining interest in accepting the dollar as a medium of exchange. It was in October 2000 that Saddam insisted that Iraq's oil be paid for in euros. But now Russia wants payment for the energy it exports in rubles. Venezuela and Iran insist on euros. Kuwait has recently unpegged its dinar from the dollar in favor of a basket of currencies.

The dollar has indeed shown symptoms of its decline in popularity during the Bush years. The dollar has weakened against the euro, gold, copper and other hard assets and currencies. When Bush came in office, for example, you could get .987 euros for every dollar. Now you can only get 75. You could say that at $65 per barrel, oil is getting more valuable... or you could say the value of the dollar has declined as measured by oil.

Mainstream economists seem to agree that best-case, the dollar will continue a stately decline, but in a world where the United States has lost so much respect, where we continue to flood the world with dollars and borrow to finance our consumer habit, we could find that one of those sharp, depression-inducing discontinuities occurs--like, say, a run on the dollar.

We are continuing to import 60 percent of the 20.6 million barrels of oil we use daily. And though the size and stability of our economy is likely to insure a demand for the dollar at some level, oil that anyone can buy for hard currency may be getting scarcer. Governments have begun to do deals aimed at taking oil off the market for their own account -- deals like the ones China has done with Angola, Brazil, Iran, Nigeria, Venezuela and Sudan. South Korea has just announced it will follow suit.

If our military cannot secure oil by force, and if oil is destined to cost us more and more of a declining currency to buy what is available, then "brand USA" is in trouble. When Bush leaves office, this country will have to begin the difficult task of reversing some very bad trends in the military, fiscal, monetary and energy areas. The pollution of his legacy transcends mere politics.

--Ken Miller is chairman and CEO of Ken Miller Capital LLC in New York.